Environmental, social and governance (ESG) criteria each merit consideration when assessing a company’s sustainability impact. Yet, the social pillar tends to be overshadowed by companies’ narrow definitions of what it means to be “sustainable”.
For more than 20 years, Sustainalytics has provided ESG research and services to investors to help them develop and implement responsible investment strategies. Through our experience working with companies and their shareholders, we have observed an imbalance between the significant investor interest in human rights issues and the low level of related company transparency.
The International Labour Organization (ILO) has estimated that 90% of forced labor victims are exploited in the private economy; yet there has been little attention paid to the role of companies in perpetuating such practices.
Legislation such as the California Transparency in Supply Chains Act (SB 657) is a good start in bringing attention to the human dimension of sustainable supply chains. Disclosure requirements, as mandated by SB 657, can promote awareness among companies and distinguish the leaders from those that have yet to take action. It also provides stakeholders, especially investors, with insights into a company’s ESG preparedness and performance. While not an end in itself, disclosure is an important proxy of a company’s commitment and preparedness to manage its impact on stakeholders.
Still, it is hard to tell how much of a difference SB 657 will make. The act is vague, and it is difficult to determine exactly which industries and companies are subject to compliance. Another major weakness is that SB 657 does not require companies to abide by any standards in particular. Companies can comply with its terms by disclosing that they take none of the five steps on which they are asked to report, as Hyundai Motor America and Caterpillar have done.
Despite the low bar set by the law, there are significant differences in the level of disclosure both within and across industries. In the KnowTheChain dataset, the consumer discretionary and consumer staples sectors, which face considerable stakeholder scrutiny, have high disclosure rates of 87% and 91%, respectively. Unexpectedly, 90% of the materials companies assessed posted statements, which is surprising given the lack of historical attention to supply chain risks in that sector. Meanwhile, with the exception of a few leaders, such as Intel, HP and Apple, the IT sector is a surprising laggard, with only 63% of the IT companies assessed posting disclosures, despite widespread exposure to supply chain issues and a high level of related accountability.
Preliminary research by Sustainalytics on a subset of companies from the KnowTheChain site reveals that while 41% of companies receive top scores for the scope of their supply chain standards, 28% lack such standards altogether. Moreover, at least 14% of companies tracked lack a formal supply chain management system, while 26% disclose no related monitoring activities.
As investors increasingly scrutinize companies’ human rights impacts on employees and suppliers, mandated disclosure on human trafficking marks an important milestone. It is our hope that it will catalyze a much- needed shift from regulatory compliance to best practice.